Eurozone downturn and deficits to persist, Commission says

 
Anti-cuts protestors in Madrid earlier in February The scale of Spain's spending cuts has been unpopular, but it will have to go further if it is to meet EU targets

The eurozone recession will persist into 2013, the European Commission has conceded in its latest forecast.

Governments face an uphill battle to rein in their overspending, with Spain, France and Portugal all failing to cut their deficits to agreed targets.

Spain's deficit, at 10.2% of GDP in 2012, was well above its 6.3% target, and would stay above target into 2014.

The eurozone economy would shrink 0.3% in 2013, the Commission said, making the governments' task even harder.

Previously, the Commission had expected the 17 economies in the eurozone to collectively enjoy 0.1% positive growth this year. In 2012 the economy is estimated to have shrunk 0.6%.

Delivering its winter forecast, Commission Vice-President Olli Rehn said that unemployment across the single currency area expected to continue rising to 12.2% this year as the recession lingers. Last year's jobless rate was 11.4%.

However, he said the eurozone was expected to rebound in the last three months of this year, registering 0.7% growth in the fourth quarter.

The forecast appears somewhat more pessimistic than the European Central Bank President Mario Draghi, who last month said he believed the eurozone would begin recovering in the second half of this year.

Start Quote

The French need to do their homework”

End Quote Michael Fuchs Deputy leader of Angela Merkel's CDU party faction

The Commission's acknowledgement that the eurozone is in worse economic shape than previously mirrors a change in the International Monetary Fund's thinking. The IMF said in January that it expected the eurozone to experience a "mild recession" in 2013, having previously predicted growth.

Plea for more time

The austerity measures being implemented by eurozone governments are widely blamed by economists as a major contributor towards the Continent's economic woes, although there is disagreement among economists as to whether governments should therefore go easy on the spending cuts.

Spain, which has one of the biggest budget deficits, made the least headway in bringing its finances back under control, and faces one of the nastiest recessions.

Of its 10.2% deficit in 2012, 3.2 percentage points was due to the cost of cleaning up its banking system, which has been decimated by loans made to property developers and speculators during the last decade's housing bubble that have since proved unrepayable.

More worryingly, the Commission does not expect Spain to improve greatly over the next two years. Its deficit is forecast to be 6.7% this year, compared with a 4.5% target, and 7.2% in 2014, compared with a 2.8% target.

Spain cannot simply blame its weak economy for this outcome, the Commission implied. Madrid's structural deficit - which strips out the effect of the recession - fell only by 1.4% of GDP last year, barely half the 2.7% target set by the Commission.

However, overspending by governments across the eurozone as a whole is still expected to fall on average this year. That is despite the persistent economic downturn, which typically reduces governments' tax revenues and increases their benefit bills.

European Commission forecasts

Country Growth Deficit*
2012 estimate 2013 forecast 2012 estimate 2013 forecast

*Negative figures denote deficits, positive figures surpluses

Source: European Commission

France

0.0%

0.1%

-4.6%

-3.7%

Germany

0.7%

0.5%

0.1%

-0.2%

Greece

-6.4%

-4.4%

-6.6%

-4.6%

Ireland

0.7%

1.1%

-7.7%

-7.3%

Italy

-2.2%

-1.0%

-2.9%

-2.1%

Netherlands

-0.9%

-0.6%

-4.1%

-3.6%

Portugal

-3.2%

-1.9%

-5.0%

-4.9%

Spain

-1.4%

-1.4%

-10.2%

-6.7%

Eurozone

-0.6%

-0.3%

-3.5%

-2.8%

UK

0.0%

0.9%

-6.3%

-7.4%

European Union

-0.3%

0.1%

-3.8%

-3.4%

The Commission said that the aggregate deficits of the 17 eurozone governments would fall from 3.5% of economic output or GDP last year, to 2.8% this year.

Meanwhile, the Commission was concerned about a "surprise" fall in Portugal's economy, which shrank 3.2% in 2012 and is forecast to contract by another 1.9% in 2013.

The country may need to be granted an extra year to bring its deficit within the long-term target of 3% of GDP from an expected 4.9% this year, Prime Minister Pedro Passos said, at a specially-called press conference.

'Problem child'

The Commission is also considering giving France one more year, until 2014, to get its finances under control, according to Mr Rehn. Paris is expected to record a 3.7% deficit this year, well above the 3% target.

Earlier on Friday, France had been dubbed a "problem child" by Michael Fuchs, a senior member of German Chancellor Angela Merkel's CDU political party.

"The French need to do their homework - they're very, very behind other countries and that is alarming because France is the second biggest economy in Europe," Mr Fuchs told Germany's Deutschlandfunk radio.

The French government is under pressure to loosen up labour market rules - including the ditching of its 35-hour week - in order to regain international competitiveness.

Meanwhile, the Commission told the British government that it would need to take additional austerity measures.

The Commission said the UK was also not on target with its deficit reduction, with government overspending expecting to increase to 7.4% of GDP this year, the worst in the European Union, from 6.3% in 2012.

The UK economy was predicted grow 1% in 2013, compared with the 1.1% previously forecast.

 

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  • rate this
    -8

    Comment number 190.

    Many of the economically illiterate on here are blaming this on the Euro.

    Had the Euro never had existed: Some states would still have had massive deficits, needed austerity, cut spending and thus created a recession. Those states trading and exporting to them (Germany etc) would still have been dragged down.

  • rate this
    +6

    Comment number 189.

    let the teddie boys rule: Moribund and Balls will take over they have the go for growth answer that is needed.

    When it doesn't work they can sell the Gold.

  • rate this
    +4

    Comment number 188.

    160.HooHum
    Labours way would bankrupt us"

    Labours way very nearly has bankrupt us and we are forced to live in 'Austerity Measures' for a decade yet those that caused it are carrying on unaffected by their actions or had their incomes/wealth significantly adversly affected by it. They are still getting significantly richer even now.

    Revolution anyone?

  • rate this
    +18

    Comment number 187.

    BBC impartiality, I swear the BBC is becomming more and more out of touch with the country. Take a look at the "Editors" picks. The top rated comments go one way the picks go the other. Mix in that story on people moving out of London and the ones about benefits, austerity et cetera and I wonder where the people who write and monitor the BBC website live. I've never seen this ivory tower.

  • rate this
    +3

    Comment number 186.

    #86 - Benjy,
    I like it when people talk about Keynes - it's been suggested that the co-efficient is less than one and it's short term. Overall you lose money. The UK is in trouble because of poor short term business planning and a lack of exportable goods. There is no immediate fix, just a long term one. I just wish the public were mature enough to accept it. (I'm unemployed)

  • rate this
    +6

    Comment number 185.

    Nobody in their right mind takes such predictions seriously any more. When did the European Commission ever accurately predict anything?

  • rate this
    +14

    Comment number 184.

    The Eurozone continues to fail, negatively affecting the UK. The answer, according to the BBC/Guardian crowd, is more of the same.

    Baffling.

  • rate this
    +7

    Comment number 183.

    Time for radical action: declare a Jubilee. All debts paid, in full. Then start over, sustainably this time.

    Winners: nations, businesses, individual citizens.
    Losers: financiers who skim off money transfers rather than making anything...

  • rate this
    +1

    Comment number 182.

    The 'ordinary citizen' of every country in the EU are 'little people' caught up in a 'big problem' that they have no control over. 2008 was a big wake-up call for my family. We paid down our dept, we now live within our means, grow our own veg, re-use what we can, go without if we can't pay cash for it, this gives some peace of mind. We know a 'storm' is coming & refuse to give credence to EU lies

  • rate this
    +5

    Comment number 181.

    All economies will fail, they have been designed to fail. All money is created as debt and the interest required to service the debt doesn't get created anywhere. There isn't enough money in the economy to pay off the debt, so what do they (the governments) do? They borrow more money, which needs more interest to pay back. It's a neverending circle of debt, which will lead to collapse.

  • rate this
    +4

    Comment number 180.

    142.farkyss
    A collape of the euro would inflict short term pain but would be good in the long run. Imports would become prohibitively expensive and the companies involved would have little choice but to set up production in the EU if they wanted to sell their goods. Global Capitalism benefit is for business not for jobs/people. Profits increase as jobs are set up in the cheapest location.

  • rate this
    +3

    Comment number 179.

    Even the railway engineer running the IPCC has acknowledged the global warming standstill. The BBC doesn't seem to have picked up on this story which is here:
    http://www.theaustralian.com.au/news/nothing-off-limits-in-climate-debate/story-e6frg6n6-1226583112134
    He doesn't mention what is currently stopping CO2 induced GW that will end in 30-40 years time.

  • rate this
    -6

    Comment number 178.

    Growth of any country greatly depends on the nature of the public than the economic policy of Govt. I defenitly feel people of europe as well as UK are less working than any other fast growing developing nations of the world. Many people just relying on credit cards, with no habit of savings. If anything that is going to push down the nation, its only people's laziness and not the Government.

  • rate this
    +12

    Comment number 177.

    Note to Labour (and all others saying we should borrow more & spend more)
    You CANNOT spend your way out of debt!
    If someone has a £20K debt on their credit card (accruing interest) you take it away from them. You DO NOT give them another credit card and say "carry on" in some bizarre belief that somehow, in the end, make them money!
    Madness I tell you, Madness!!!

  • rate this
    +19

    Comment number 176.

    The Trillion Euros (yes Trillion!) sucked up by Brussells every year could simply stay in the treasuries of the sovereign states who comprise the EU.

  • rate this
    +2

    Comment number 175.

    Money is debt, so therefore... mmm, can any of the amateur economists out there see where I'm going with this?

  • rate this
    +6

    Comment number 174.

    Bad News, but how does that tally with £ weakness ??? is the Currency market a bit like LIBOR ???

    My question is is this due to GO and BOE behind closed doors or currency speculation.

    Either way I know who's pocket is being picked.

    Look at the majority consumer consumption. The grass roots of the consumer society is tanking.
    There is going to be a economic disaster if it don't improve soon.

  • rate this
    +25

    Comment number 173.

    The EU is done. It's aim was noble and like Communism, was great on paper only.

    Has it made the poorer members richer? Earnings are much higher than pre-EU days, so they're richer, right? No. Cost of living has risen more so they're worse off.

    Same for the previously richer countries: poorer from propping up the new entrants.

    Who's better off then? Mr Barroso and Mr van Rompuy of course.

  • rate this
    +36

    Comment number 172.

    There is no shock in this news.
    The single currency is making it impossible for countries with vastly different economies to grow.
    Unfortunately senior socialist European politicians, ignore basic economic common sense, because of there own poitical ambitions to have a united Europe.
    Economics and politics dont mix!!!!

  • rate this
    +3

    Comment number 171.

    "Communism is a fine ideal "

    Who said?

 

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